Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-28972 October 31, 1972

CITY COUNCIL OF CEBU CITY represented by COUNCILORS FLORENCIO S. UROT, EULOGIO E. BORRES,
RONALD DUTERTE, RAYMUNDO A. CRYSTAL, BIENVENIDO A. TUDTUD, JOHN H. OSMEÑA and MARIO R.
VELOSO, in their capacity as the Majority Members of the City Council of Cebu and as Citizens of the said
City; plaintiffs-appellants,
vs.
CARLOS J. CUIZON, Mayor of the City of Cebu, JESUS E. ZABATE, Acting City Treasurer of the City of Cebu,
PHILIPPINE NATIONAL BANK and TROPICAL COMMERCIAL COMPANY, INCORPORATED, defendants-
appellees

TEEHANKEE, J.:p

Appeal on pure questions of law from an order of the Court of First Instance of Cebu, dismissing plaintiffs' complaint upon the ground of their lack of legal capacity to
institute the action.

The seven above-named plaintiffs-appellants "by themselves and representing the City Council of Cebu, as majority
members thereof"  filed on May 31, 1966 their complaint in the court of first instance of Cebu against defendants-
1

appellees Carlos J. Cuizon, as mayor of Cebu City, Jesus E. Zabate, as acting Cebu City treasurer, Philippine National
Bank (hereinafter referred to as the bank) and Tropical Commercial Company, Inc. (hereinafter referred to as Tropical),
praying inter alia that the contract entered into on February 5, 1966 by and between defendant Mayor Cuizon on behalf
of the city for the purchase of road construction equipment from Tropical (for $520,912.00 on a cash basis or
$687,767.30 on a deferred payment basis) be declared as null and void ab initio. (The contract, as eventually annexed
by defendant Tropical with its answer, shows that its total was for $685,767.30 on a five-year deferred payment plan.) 2

Among the grounds invoked by plaintiffs-appellants for the nullity of the said contract and the complementary
transactions with the bank arising therefrom such as the corresponding letters of credit opened therefor, were that the
same were entered into without the necessary authority and approval of the city council, and that the city treasurer had
not certified to the city mayor, as required by section 607 of the Revised Administrative Code that funds have been duly
appropriated for the said contract and that the amount necessary to cover the contract was available for expenditure on
account thereof, and that accordingly, the purported contract entered into by the city mayor was "wholly void" under the
provisions of section 608 of the same code, which make "the officer assuming to make such contract ... liable to the
government or other contracting party for any consequent damage to the same extent as if the transaction had been
wholly between private parties." As summarized by plaintiffs-appellants, the background facts that led to their filing of
their complaint were as follows:

a) On November 20, 1965, the City Council approved Resolution No. 1648, quoted as follows:

RESOLUTION NO. 1648

The City Council, on motion of City Councilor Borres, seconded by City Councilor
Tudtud,

RESOLVED, to authorize His Honor, the City Mayor, for and in behalf of the City of
Cebu, to negotiate and to contract for, by public bidding, on deferred payment plan and
by lot bid, U.S. or European made road construction equipments for the City of Cebu
and authorizing him for this purposes, to sign the corresponding contract and other
pertinent papers.
 RESOLVED FURTHER, to request the City Mayor to call soon a public bidding for the
early acquisition of said equipments.

CARRIED UNANIMOUSLY

b) On December 23, 1965, the City Council of Cebu approved Resolution No. 1831, which also reads
as follows:

RESOLUTION NO. 1831

The City Council, on motion of City Councilor Llanos, seconded by City Councilor
Veloso,

RESOLVED, to authorize the City Mayor, in connection with the authority granted him
under Resolution No. 1648, current series, to utilize the Time Deposit of the City of Cebu
with the Philippine National Bank, as Bond guarantee in the opening of a Letter of Credit
in connection with the City of Cebu's application to directly purchase road construction
equipments from abroad, to the extent of the amount that the Letter of Credit may
require.

CARRIED UNANIMOUSLY

c) By reason of the fact that the call to bid by the defendant City Mayor Carlos J. Cuizon were for
bidders who should be exclusive distributors of the equipments being bidded and the said supplier must
have a sales and service outlet in the City of Cebu, the other bidders then became disqualified and the
bid was awarded to the only bidder, the defendant Tropical Commercial Co., Inc. Hence, on January 20,
1966, the City Council approved Resolution No. 122, which we quote as follows:

RESOLUTION NO. 122

The City Council on motion of City Councilor Borres, seconded by Councilor Osmeña,

RESOLVED, to request the Award Committee to forward to this Body the pertinent
papers in connection with the bidding for two (2) complements of light and heavy
equipments to be used by the City Engineering Department for ratification by this Body.

CARRIED UNANIMOUSLY

d) Notwithstanding the request contained in Resolution No. 122, the defendant City Mayor, Carlos J.
Cuizon, without having been duly authorized thru proper resolution of the City Council, and without
compliance with Resolution No. 122, signed a contract with the Tropical Commercial Co., Inc. for the
acquisition of the heavy equipments on February 5, 1966. 3

e) On February 14, 1966, the City Council, without knowledge that the contract had already been signed
by defendant City Mayor Carlos J. Cuizon and the Tropical Commercial Co., Inc. — since the same was
signed in the City of Manila — approved Resolution No. 292, which we quote as follows:

RESOLUTION NO. 292

The City Council, on motion of City Councilor Osmeña, seconded by City Councilor
Tudtud,

RESOLVED, to reiterate this City Council's request embodied in its Resolution No. 122,
current series, addressed to the Award Committee to forward to this body the pertinent
papers in connection with the bidding for two (2) complements of light and heavy
equipments to be used by the City Engineering Department for ratification by this Body.

CARRIED UNANIMOUSLY
f) On March 10, 1966, in view of the fact that the defendant City Mayor ignored the requests of the City
Council, the said City Council approved Resolution No. 473, which we quote as follows:

RESOLUTION NO. 473

The City Council, on motion of City Councilor Crystal, seconded by City Councilor
Duterte,

RESOLVED, to revoke Resolution No. 1648 dated November 29, 1965 and Resolution
No. 1831, dated December 23, 1965, authorizing His Honor, the City Mayor, to negotiate
and to contract for, by public bidding, on deferred payment plan and by lot bid, U.S. or
European made road construction equipments for the City of Cebu and authorizing him
for this purpose, to sign the corresponding contract and other pertinent papers and
authorizing the City Mayor to utilize the Time Deposit of the City of Cebu with the
Philippine National Bank, as bond guarantee in the opening of a Letter of Credit in
connection with the City of Cebu's application to directly purchase road construction
equipments from abroad, to the extent of the amount that the Letter of Credit may
require, respectively.

RESOLVED FURTHER, to inform His Honor the City Mayor, that the City Council, after
careful deliberation, has decided to discontinue with the purchase of road construction
equipments.

RESOLVED FINALLY, to advise all bidders of the action of the City Council and to reject
their bids on the basis thereof.

CARRIED BY MAJORITY VOTES

Voting in favor: City Councilors Crystal, Duterte, Tudtud, Borres, Osmeña, Veloso and
Zamora (Presiding Officer Urot voted in favor)

Voting against: City Councilor Llanos.

g) On March 18, 1966, the presiding officer of the City Council, City Councilor Florencio S. Urot, sent a
telegram to the Manager of the Philippine National Bank, which we quote as follows:

TELEGRAM

MANAGER
PHILNABANK
MANILA

BEEN INFORMED BY MANAGER DIKITANAN CEBU BRANCH THAT MAYOR

CUIZON CEBU CITY OPENED LETTER OF CREDIT FOR PURCHASE OF HEAVY
EQUIPMENT STOP PLEASE BE INFORMED THAT CEBU CITY COUNCIL HAS
REVOKED MAYOR'S AUTHORITY ON THIS PARTICULAR MATTER LAST MARCH
TEN THEREBY SUSPENDING FURTHER NEGOTIATIONS ON THIS TRANSACTION
END.

PRESIDING OFFICER
UROT

h) On March 18, 1966, the defendant Acting City Treasurer, Jesus E. Zabate, sent a reply to the Asst.
Vice-President of the defendant Philippine National Bank in Cebu City refusing the request of the
Philippine National Bank (to withhold P3,000,000.00 from the time deposit of the City of Cebu) on the
ground that no appropriation for the purchase of heavy equipments was made by the City Council.
 i) That notwithstanding the knowledge of the revocation by Resolution No. 473 of Resolution No. 1648
and Resolution No. 1831, series of 1965 of the City Council of Cebu City, the said City Mayor, Carlos J.
Cuizon, continued with the transaction by placing the order with the Equipment Division of the
Continental Ore Corporation of New York U.S.A. for the purchase of the said heavy equipments. 4

Hence, plaintiffs-appellants filed their complaint against defendants-appellees, incorporating the foregoing antecedents
and averments, and praying for judgment of the court

(a) to declare null and void ab initio the contract entered into by and between the City Mayor, Carlos J.
Cuizon and the defendant Tropical Commercial Company, Inc., for the purchase of the equipments
referred to in paragraph VII of this complaint;

(b) to declare null and void ab initio and without any effect the Letters of Credit opened with the
defendant Philippine National Bank by the defendant City Mayor of Cebu, Carlos J. Cuizon;

(c) to exempt the City of Cebu and to hold the same not liable for any and all obligations to the
defendant Philippine National Bank which may result from the unauthorized opening of the Letters of
Credit by the defendant City Mayor of Cebu;

(d) to exempt and hold not liable the City Government of the City of Cebu from any obligation regarding
the contract specified in paragraph (a) hereof;

(e) to enjoin and order the defendant City Mayor of Cebu, the defendant City Treasurer of Cebu, the
City Auditor, City Engineer and any and all public officials and employees of the City of Cebu not to
receive the equipments if they were already ordered and in the event that they will arrive for delivery;

(f) to grant any and other remedies to which the plaintiffs may be entitled under the law. 5

Defendants City Mayor and Tropical filed in due course their respective answers to the Complaint, with counterclaims
and traversed the allegations of the complaint.

Defendant mayor's counterclaim, contending that the suit was unfounded and intended to harass and embarrass him
prayed for judgment against plaintiffs for actual and temperate damages as may be ascertained by the trial court, P1-
million moral damages, P50,000. — exemplary damages, P50,000. — attorney's fees and expenses of litigation with
costs.6

Defendant Tropical's counterclaim, prayed for judgment "in the event that this Honorable Court should hold that the
plaintiffs have the capacity or interest to bring this suit in behalf of the City of Cebu,"  in the total sum of P242,939.90
7

with legal interest, representing bank charges in the sums of P86,267.76 and P156,672.14 which it had as seller
advanced in cash for two letters of credit opened by the bank to cover the price of the equipment contracted for by the
city mayor on behalf of the city. Defendant Tropical averred that "said advances were actually cash payments made by
(it) to the Philippine National Bank upon request of the city mayor and upon the representation of the city mayor that
(he) was acting for and in behalf of the City of Cebu."8

Defendant acting city treasurer filed his separate answer in effect affirming the nullity ab initio of the questioned
contract for the reasons and circumstances averred in plaintiffs' complaint. He further set up special defenses averring
that the assignment by way of guaranty by the city mayor of P3-million of the city's time deposit with the defendant bank
was null and void and done without his consent nor knowledge as the official responsible for said fund, and prayed for
the dismissal of the case against him alone.

Defendant bank in its turn filed a motion to dismiss the plaintiffs' complaint on the grounds of plaintiffs' lack of legal
capacity to sue and failure of the complaint to state a cause of action against it. The first stated ground of plaintiffs'
alleged lack of legal capacity to bring the suit had also been alleged as an affirmative defense by defendants mayor
and Tropical in their respective answers, with defendant mayor asking for a preliminary hearing on his affirmative
defenses as if a motion to dismiss had been filed. 9

Plaintiffs on their part filed their responsive pleadings. In their answer to the mayor's counterclaim, they averred that
"the present complaint was filed with no other purpose than to secure the annulment of a contract which had
been entered into by defendant mayor in violation of his authority from the City Council of Cebu City, to the great
prejudice and detriment of the City of Cebu and accordingly, well within the concern of the plaintiffs to pursue, not only
as majority members of the City Council but also as individual taxpayers and citizens of this community  which is the
City of Cebu." 10

In their opposition to the motion to dismiss,   plaintiffs asserted inter alia their right as city officials and taxpayers to
11

question the validity of the contract entered into by the defendant city mayor and to contest the expenditures of the
city's funds therefor beyond the mayor's authority or the disposition thereof in an unlawful or prohibited manner.

Plaintiffs also filed a separate reply to the mayor's affirmative defenses,   refuting the mayor's claim of estoppel by
12

citing the principle that estoppel cannot be founded upon an illegal act and submitting therewith the Auditor General's
endorsement of June 16, 1966 affirming the city auditor's prior endorsement of nullity ab initio of the questioned
contract for non-compliance with the requirements of sections 607 and 608 of the Revised Administrative Code.
Pertinent excerpts of Auditor-General Ismael Mathay, Sr.'s endorsement read:

Opinion of this Office is being requested on the validity of the herein contract for the purchase of heavy
equipment and machineries entered into by and between Mayor Carlos J. Cuizon of Cebu City for and
in behalf of the City Government of Cebu by virtue of Resolution No. 1648, series of 1965, of the City
Council, and Tropical Commercial Co., Inc.

It appearing from the within papers that the City Council of Cebu has not appropriated funds for
purposes of the contract in question, for which reason the City Treasurer could not have certified, even
if he wanted to, as in fact he did not make the certification required under the aforequoted provisions of
law, which is a condition precedent to the validity of the contract, this Office concurs in view of the City
Auditor in the preceding second indorsement that the said contract is null and void ab initio.

In view of the nullity of the herein contract, all claims arising therefrom may not be allowed.  13

Defendant mayor, in turn, in his motion for immediate resolution of pending motion to dismiss dated October 5,
1966,   contended that "the General Auditing Office, through the Auditor General, has already withdrawn or recalled its
14

ruling declaring the said contract null and void ab initio."

On October 6, 1966, the lower court issued the order of dismissal appealed from. In ordering the dismissal of plaintiffs'
complaint on the ground of their lack of legal capacity to sue and their not being the "real party in interest," the lower
court reasoned as follows:

It is uncontroverted that the contract now sought to be annulled was signed by the City Mayor in behalf
of the contracting party, the City of Cebu, by virtue of the authority granted him by Resolution No. 1648
of the city council. Now, the majority members of this council who have given authority to the City Mayor
to execute the contract are filing this complaint and seek to annul the said contract. Their power to file
the action either as such councilors or as private citizens is being questioned.

Article 1397 of the New Civil Code provides that action for annulment of contracts may be instituted by
all who are thereby obliged principally or subsidiarily. In other words, the plaintiffs must have an interest
in the contract. In the instant case the plaintiffs, in their capacity as city councilors or tax payers are not
parties to the contract executed by the City of Cebu and there is no evidence to show that because of
the contract they may be prejudiced or may suffer injury different from that of the public in general. The
City of Cebu being the party to the contract, any action brought regarding the said contract must be
instituted in the name of the City of Cebu and by the person authorized to do so. Section 20(c) of the
Revised Charter of Cebu City (Republic Act No. 3857) empowers the City Mayor to "cause to be
instituted judicial proceedings to recover properties and funds of the city wherever found and cause to
be defended all suits against the City." There is no provision in the said Charter which authorizes
expressly or impliedly the city council or its members to bring an action in behalf of the City.

Section 2, Rule 3 of the new Rules of Court provides that every action must be prosecuted in the name
of the real party in interest. "The real party in interest is the party who would be benefited or injured by
the judgment, or the party entitled to the avails of the suit" (Salonga vs. Warner Barnes & Co. Ltd., L-
2246, Jan. 1, 1951). As stated above, the plaintiffs acting either as members of the city council or as
private citizens are not bound by the contract in question and cannot maintain an action to annul the
 same since they will not be benefited or prejudiced by the judgment of the case. They have no right to
the contract and they will not suffer injuries different from that of the public in general. They are not,
therefore, the real party in interest. In the same way as the plaintiffs are not the real party in interest, the
defendant Carlos Cuizon may not be bound by the judgment herein and he cannot be sued as party
defendant.

Hence this appeal. Plaintiffs-appellants and defendant-appellee Philippine National Bank filed their respective briefs in
due course. The other defendants-appellees, the city mayor, the city treasurer and Tropical failed to file their briefs, with
Tropical's extended period to do so having expired on January 4, 1969, and the case was deemed submitted for
decision on March 17, 1969.

1. It seems clearly self-evident from the foregoing recitation of the undisputed antecedents and factual background that
the lower court gravely erred in issuing its dismissal order on the ground of plaintiffs' alleged lack of interest or legal
standing as city councilors or as taxpayers to maintain the case at bar. The lower court founded its erroneous
conclusion on the equally erroneous premise of citing and applying Article 1397 of the Civil Code that "the action for the
annulment of contracts may be instituted (only) by all who are thereby obliged principally or subsidiarily."  15

The lower court's fundamental error was in treating plaintiffs' complaint as a personal suit on their own behalf and
applying the test in such cases that plaintiffs should show personal interest as parties who would be benefited or
injured by the judgment sought. Plaintiffs' suit is patently not a personal suit. Plaintiffs clearly and by the express terms
of their complaint filed the suit as a representative suit on behalf and for the benefit of the city of Cebu.

Without passing upon or prejudging the merits of the complaint, it is not disputed that taken by themselves without
considering the contrary evidence or defenses that might properly be set up by defendants at the trial, the allegations of
the complaint state a sufficient cause of action on the basis of which judgment could be validly rendered by the lower
court declaring the nullity of the questioned contract and letters of credit and declaring the City of Cebu exempt and free
from any and all liability on account thereof, as prayed for by plaintiffs. Defendant bank in its brief concedes that "we
find no ruling that the complaint was dismissed for lack of cause of action against the appellee Philippine National
Bank." 16

The appeal at bar must therefore be granted and the case ordered remanded to the lower court where the parties may
be properly given the opportunity at the trial to present evidence in support of their respective contentions for
disposition and judgment on the merits.

2. The lower court entirely missed the point that the action filed by plaintiffs-appellants as city councilors (composing
practically the entire city council, at that) and as city taxpayers is to declare null and void the P3-million contract
executed by defendant city mayor for the purchase of road construction equipment purportedly on behalf of the city
from its co-defendant Tropical and to declare equally null and void the corresponding letters of credit opened with the
bank by defendant mayor and to prevent the disbursement of any city funds therefor and to exempt the City of
Cebu and hold it not liable for any obligation arising from such contract and letters of credit specifically and precisely
questioned in the complaint filed by plaintiffs on behalf of the City as having been executed without authority and
contrary to law.

Plaintiffs' suit is clearly not one brought by them in their personal capacity for the annulment of a particular contract
entered into between two other contracting parties, in which situation Article 1397 of the Civil Code may rightfully be
invoked to question their legal capacity or interest to file the action, since they are not in such case in anyway obliged
thereby principally or subsidiarily.

On the contrary, plaintiffs' suit is one filed on behalf of the City of Cebu, instituted by them in pursuance of their
prerogative and duty as city councilors and taxpayers, in order to question and declare null and void a contract which
according to their complaint was executed by defendant city mayor purportedly on behalf of the city without valid
authority and which had been expressly declared by the Auditor-General to be null and void ab initio and therefore
could not give rise to any valid or allowable monetary claims against the city.

3. Plaintiffs' right and legal interest as taxpayers to file the suit below and seek judicial assistance to prevent what they
believe to be an attempt to unlawfully disburse public funds of the city and to contest the expenditure of public funds
under contracts and commitments with defendants bank and Tropical which they assert to have been entered into by
the mayor without legal authority and against the express prohibition of law have long received the Court's sanction and
recognition. In Gonzales vs. Hechanova,   the Court through the now Chief Justice dismissed the challenge against the
17
sufficiency of therein petitioner's interest to file the action, stating that "since the purchase of said commodity will have
to be effected with public funds mainly raised by taxation, and as a rice producer and landowner petitioner must
necessarily be a taxpayer, it follows that he has sufficient personality and interest to seek judicial assistance with a view
to restraining what he believes to be an attempt to unlawfully disburse said funds."

Even defendant Tropical so understood that plaintiffs' suit was a representative suit in behalf of the City of Cebu, hence
their counterclaim in their answer, should the lower court uphold plaintiffs' "capacity or interest to bring this suit in behalf
of the City of Cebu," for judgment against the City of Cebu for the repayment with legal interest of bank charges in the
total sum of P242,939.90 which it had advanced on the letters of credit opened by the defendant bank at the mayor's
instance in favor of its U.S. supplier, supra."  18

Parenthetically, it may be noted with reference to said letters of credit opened by the bank at the mayor's instance, that
the same were caused by the mayor to be established, according to the allegations of the complaint, notwithstanding
the mayor's knowledge and notice of the city council having revoked by its resolution No. 473 on  March 10, 1966 its
previous resolutions authorizing him to enter into the transaction, supra.  19

4. Plaintiffs' right and legal interest as city councilors to file the suit below and to prevent what they believe to be
unlawful disbursements of city funds by virtue of the questioned contracts and commitments entered into by the
defendant city mayor notwithstanding the city council's revocation of his authority with due notice thereof to defendant
bank must likewise be recognized.

The lower court's narrow construction of the city charter, Republic Act No. 3857, that under section 20 (c) thereof, it is
only the city mayor who is empowered "to cause to be instituted judicial proceedings to recover properties and funds of
the city wherever found and cause to be defended all suits against the city," and that plaintiffs' suit must therefore fail
since "there is no provision in the said charter which authorizes expressly or impliedly the city council or its members to
bring an action in behalf of the city" cannot receive the Court's sanction.

The case at bar shows the manifest untenability of such a narrow construction. Here where the defendant city mayor's
acts and contracts purportedly entered into on behalf of the city are precisely questioned as unlawful, ultra vires and
beyond the scope of his authority, and the city should therefore not be bound thereby nor incur any liability on account
thereof, the city mayor would be the last person to file such a suit on behalf of the city, since he precisely maintains the
contrary position that his acts have been lawful and duly bind the city.

To adhere to the lower court's narrow and unrealistic interpretation would mean that no action against a city mayor's
actuations and contract in the name and on behalf of the city could ever be questioned in court and subjected to judicial
action for a declaration of nullity and invalidity, since no city mayor would file such an action on behalf of the city to
question, much less nullify, contracts executed by him on behalf of the city and which he naturally believes to be valid
and within his authority.

5. Section 20 (c) of the city charter invoked by the lower court, however, has no applicability to the present suit, which
is not one to recover properties and funds of the city or a suit against the city, but rather a representative suit on behalf
of and purportedly for the benefit of the city, which the city mayor is however loath to institute.

Under such circumstances, in the same manner that a stockholder of a corporation is permitted to institute derivative or
representative suits as nominal party plaintiff for the benefit of the corporation which is the real party in interest,    more
20

so may plaintiffs as city councilors exclusively empowered by the city charter to "make all appropriations for the
expenses of the government of the city"   and who were the very source of the authority granted to the city mayor to
21

enter into the questioned transactions which authority was later revoked by them, as per the allegations of the
complaint at bar, be deemed to possess the necessary authority, and interest, if not duty, to file the present suit on
behalf of the City and to prevent the disbursement of city funds under contracts impugned by them to have been
entered into by the city mayor without lawful authority and in violation of law.

ACCORDINGLY, the order appealed from is hereby set aside and the lower court is ordered to proceed with the trial
and disposition of the case below on its merits. No costs. So ordered.

Concepcion, C.J., Zaldivar, Castro, Fernando, Barredo, Makasiar, Antonio and Esguerra, JJ., concur.

Makalintal, J., is on leave.